IN DEPTH: GCF heads toward complex, pragmatic new phase

After being in operation for over two years, it is time for the Green Climate Fund to review results, straighten out the strategy, and take on new challenges.

The Fund was created in 2010 by the United Nations and formally established in 2011. It reached the actual capacity to fund climate-related projects in May 2015. In 2016 the total GCF resources committed amounted to USD 1.3 billion, a significant progress from the first year’s financing activity (eight projects financed in 2015 for a total GCF investment of USD 168 million) but it fell short of the announced aspirational target of approving USD 2.5 billion in funding proposals by the end of 2016.

So far in 2017, the GCF approved eight new projects and programmes valued at USD 755 million in GCF funding to assist developing countries in responding to climate change. Taking the new projects into account, currently the Fund’s portfolio consists of 43 projects and programmes for USD 2.2 billion in GCF funding (provided mostly through grants and loans), leveraging USD 5 billion of co‐financing. According to the review provided during the latest GCF Board meeting in Songdo in July, only USD 6.6 million has been actually disbursed for three approved projects. It is a small amount when considering the fact that the GCF is expected to be the main channel for at least USD 100 billion in climate finance by 2020, promised by the richer countries to help less equipped and more vulnerable states.

Current and former GCF board members contacted by Reuters acknowledged the fund had been slow to activate but said “it was difficult to get projects off the ground and unreasonable to expect big flows of money straight away”. Also, legal complexities are still to be settled down (such as the fact that the fund is not a formal UN agency and its staff lack legal protection, for instance, from prosecution if projects go awry). “The fund is like a plane that’s taken off but we’re still building it in mid-air”, a board member told Reuters. “That’s a risky situation”.

Hurdles also come from the halt of disbursement by US government, jeopardizing about 20 percent of the Fund’s current budget. To date a total of 43 state governments, including 9 representing developing countries, have made a pledge to the GCF for an overall promised contribution of USD 10.3 billion. Under the Obama administration, the US has pledged USD3 billion but so far only one billion has been paid. In several occasions, Donald Trump announced no further payment to the fund will be made and during the recent Environment Ministerial Meeting of the G7 only Canadian representatives stepped forward to increase national contribution in the absence of the US. An official from Swiss Foreign Ministry told Reuters the US was likely to be recorded as in arrears and there is no legal recourse to demand Trump pays more, as national payments are voluntary.

Further problems may arise from the fact that the US still keeps a seat on the GCF board as an actual contributor. According to Bloomberg, the US intends to use its role to lobby for projects supporting “American-energy interests globally”, such as “clean coal” projects and natural gas infrastructure.

However, the GCF’s main challenge for the next months and years remains to be adjusting its current strategy and its operational toolbox in order to make it more effective, and scaling up implementation. The review presented at the latest GCF board meeting highlights some positive progress but also key areas for improvement. The positive sign is that GCF funding seems to be flowing where it is most needed. Out of the 43 approved projects and programmes, 29 target LDCs, SIDS and African States, accounting for 84 percent of the total committed GCF funding amount (see graph). Moreover, the GCF “Readiness” programme, designed to support countries in developing capacity to accept full-scale climate assistance, has committed USD 30 million to process over 100 requests from 78 countries so far. About half of them are under implementation or have been completed in 2016.

On the other hand, the current project portfolio leans more heavily towards mitigation (see graph), despite GCF commitment for a 50:50 balance between mitigation and adaptation investments. Approved projects from the public sector (32 out of 43, accounting for USD 1.048 million of GCF funding) are more adaptation-oriented, while in the private‐sector portfolio (11 projects with GCF funding of USD 1.192 million) there is a strong focus on energy access and generation. The overall portfolio is lacking proposals on some key areas, such as low‐emission transport and infrastructure resilience. Moreover, the current GCF financial products have proved to be not flexible enough to allow for efficient deployment of resources, in particular for concessional loans for public-sector projects.

Key recommendations to address these issues make clear that the GCF should have a new proactive role in the next months and years. This includes the issuance of specific requests, the prioritization of project ideas and concept notes targeting those areas the GCF portfolio is currently lacking, and fast‐track accreditation of entities focused on the areas of interest. The GCF should also increase efforts to support countries more directly and to receive more projects from Direct Access Entities (nominated by National Designated Authorities), instead of from United Nations agencies or multilateral development banks (named “International Access Entities” in GCF procedural language, they do not need to be nationally-nominated develop and manage GCF funding proposals). A new strategy to reach this goal includes engaging more with National Designated Authorities and providing additional flexibility for public-oriented financial products.

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